Social Media: Tapping the wisdom and the madness of crowds to find alpha at The Trading Show Chicago

Social media is certainly a topic that has attracted much attention over the past few years. The apex of the current social media “craze” is Facebook’s IPO and its value, which is still not clear at the moment. A difficult objective of anyone valuing the utility of these organizations is to determine worth through anticipated cash flow and potential revenue streams. Perhaps there are other uses for the aggregate information that can be used to generate something useful? Dr. Craig Kaplan of iQTick Advisors knows how to extract relevant data from the mountains of social transactions online and separate what is needed according to his two approaches.

Dr. Kaplan’s background is quite unique but certainly relevant to understanding markets. He is classically trained as a doctorate in cognitive psychology. Dr. Kaplan spent a number of years working in the field of his study until 2005 when he transitioned his skill set to financial markets, specifically applying data mining techniques to mine the collective intelligence of investors.

Dr. Kaplan describes two approaches to filter through the wisdom of crowds, the "Jelly Beans in a Jar"(JBIJ) and "Needles in a Haystack" (NIAH) approaches. The JBIJ approach mines the clusters of investment opinions. Using software to mine these clusters helps to mitigate the bounded rationality condition which limits our perspective. Our ability as humans to internalize vast sets of information is certainly not as good as an application’s ability to process data continuously. Therefore, what we may construe as a result of our analysis is surely bounded. The NIAH approach seeks to find the wisdom in an outlier among the crowds. The outlier in this case may very well represent contrarian price changes that were not directionally expected from the JBIJ approach. The NIAH approach does have its challenges such as separating randomness from potential outlier information, being susceptible to agents that “game” the system placing incorrect information online, and building cooperation so that sharing valuable information is a non-threatening option for its participants.

The field of collective intelligence including applications to the stock market is just in its infancy, “It is hard to overstate the upside, and the field is just in its infancy.”

-Original content provided by Safraz Rampersaud, an on-site blogger at The Trading Show Chicago